Jens Weidmann, president of Germany’s Bundesbank, is concerned about the future of monetary policy. In a speech this week, he claimed that some governments are eroding the independence of their central banks. He also warned against the risks of a politicisation of exchange rates, which could bring the world back to the era of “competitive devaluations”. For now, both fears are overstated.
This newspaper firmly believes in central bank independence. Leaving politicians at the helm of monetary policy, as happened in the 1970s and 1980s, undermines their fiscal discipline and can result in high and volatile inflation. Yet the power of technocrats is not absolute. Democratically elected governments still have a role to play. They have the right to choose a governor whose preferences regarding inflation are broadly consistent with their own. In some countries, such as the UK, politicians also set the central bank’s objectives.
Economies can also benefit from some co-ordination between fiscal and monetary policy. This has become all the more evident since the crisis. True, monetary policy should not be a shortcut to growth, so that governments can avoid taking painful structural reforms. But at a time in which both the public and the private sectors are deleveraging, governments have the right to ask for monetary easing. When central bankers respond, they may be doing their job, not necessarily bowing to pressure.